Restraining Government in America and Around the World

Great Moments in Government Stupidity and Incompetence

For those who favor truth in labeling, the housing meltdown and related financial crisis and economic downturn should be brightly stamped with the phrase, “Made in Washington.” Here are two good pieces of evidence. First, this paper from the American Enterprise Institute is one of the best big-picture analyses on the issue. It identifies how “affordable lending” policies are at the heart of the problem. Here’s an excerpt from the abstract.

Government policies forced a systematic industry-wide loosening of underwriting standards in an effort to promote affordable housing. This paper documents how policies over a period of decades were responsible for causing a material increase in homeowner leverage through the use of low or no down payments, increased debt ratios, no loan amortization, low credit scores and other weakened underwriting standards associated with NTMs. These policies were legislated by Congress, promoted by HUD and other regulators responsible for their enforcement, and broadly adopted by Fannie Mae and Freddie Mac (the GSEs) and the much of the rest mortgage finance industry by the early 2000s. Federal policies also promoted the growth of overleveraged loan funding institutions, led by the GSEs, along with highly leveraged private mortgage backed securities and structured finance transactions. HUD’s policy of continually and disproportionately increasing the GSEs’ goals for low- and very-low income borrowers led to further loosening of lending standards causing most industry participants to reach further down the demand curve and originate even more NTMs. As prices rose at a faster pace, an affordability gap developed, leading to further increases in leverage and home prices. Once the price boom slowed, loan defaults on NTMs quickly increased leading to a freeze-up of the private MBS market. A broad collapse of home prices followed.

Nearly half of the 1.3 million homeowners who enrolled in the Obama administration’s flagship mortgage-relief program have fallen out. The program is intended to help those at risk of foreclosure by lowering their monthly mortgage payments. Friday’s report from the Treasury Department suggests the $75 billion government effort is failing to slow the tide of foreclosures in the United States, economists say. More than 2.3 million homes have been repossessed by lenders since the recession began in December 2007, according to foreclosure listing service RealtyTrac Inc. Economists expect the number of foreclosures to grow well into next year. “The government program as currently structured is petering out. It is taking in fewer homeowners, more are dropping out and fewer people are ending up in permanent modifications,” said Mark Zandi, chief economist at Moody’s Analytics. …Many borrowers have complained that the government program is a bureaucratic nightmare. They say banks often lose their documents and then claim borrowers did not send back the necessary paperwork. The banking industry said borrowers weren’t sending back their paperwork. They also have accused the Obama administration of initially pressuring them to sign up borrowers without insisting first on proof of their income. When banks later moved to collect the information, many troubled homeowners were disqualified or dropped out. Obama officials dispute that they pressured banks. They have defended the program, saying lenders are making more significant cuts to borrowers’ monthly payments than before the program was launched. And some of the largest mortgage companies in the program have offered alternative programs to those who fell out.

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One thing to improve your credit score is to maintain your credit report. Make sure all the minimum payments of your credit getting paid on time for at least last 12 months. If you are planning to buy new home in the future, please don’t take new loans for it as because it will harm you credit score rating. You can continue your fist loans by adding up your amount of credit and set the monthly payment at affordable cost. This will boost your credit score in the future as long as you can maintain your monthly payment on time.

This is In My Humble Opinion (IMHO) one of the BEST analysis of the crisis ever written.

I am myself an ultra libertarian supply sider but I am permanently saddened by how libertarians often rely on AUSTRIAN economics perhaps because austrians too are libertarians. I agree with this NON AUSTRIAN explanation.

Prominent Supply Siders like Arthur Laffer IMHO were wrong when they alleged there was no housing bubble, and that huge error IMHO will do enormous damage to Supply Side Economics which are, by much, the best economic theoretical frame. We must now IMHO correct such a big error.

Some Supply Siders may have been wrong with the housing bubble but it is clear that the austrian “loose money” explanation of the Great Depression is nonsense because the exact opposite happened, there was very “tight” money because the world came back to the Gold Standard around 1925 and when superpowers like Germany, France and Britain demanded more gold as money then the value of gold increased bringing “tight” money. One can read Supply Sider Robert Mundell Nobel Prize lecture http://www.robertmundell.net/NobelLecture/nobel3.asp to understand how we had “tight” money but they gave us even more “tight” money as a “solution”. And then, with taxes and regulations, they turned the crisis into the Great Depression

When one reads Von Mises blog one can see shallow comments. I read very carefully the “employment” part of austrian Henry Hazlitt demolition of John Maynard Keynes orwellian pseudoscience but eventough Hazlitt is brilliant demolishing Keynes, Hazlitt is sometimes careless and says wrong about Keynes where there is not and sometimes says that Keynes said something that Keynes actually never said. I think moreover that austrian economics -like keynesian economics- may be unable to explain the obvious fact that “tight” money caused a crisis that taxes, regulations and more “tight” money turned into the Great Depresion.

It is not that difficult to see austrian errors because austrian tend to be clear and honest. Sadly it is much difficult to see the huge errors in John Maynard Keynes orwellian pseudoscience because Keynes is so confuse, so imprecise and is always, with new logical errors and bizarre definitions and comments, distracting ones attention from the essential.

Keynes turned vice into virtue and virtue into vice “justifying” an orwellian system where the capitalist world is “saved” from its errors by giving politicians and bureaucrats insane power, by making the old poor and dependent on politicians and taxes on the youth instead of being rich and dependent on their savings.

The big problem is that austrians, by demonizing the sound investments that occured before the Great Depression, are IMHO seen by common people as saying that keynesians are right when they demonize savings.

Keynes demonize savings with nonsense arguments like alleging the existence of a “definite ratio” between investment and output. Such falsehood is used to build a huge edifice of orwellian pseudoscience. But IMHO normal people understand that if you demonize savings then you demonize investment too, Keynes himself insisted that savings and investment were the same quantity so obviously if you demonize one you demonize the other, people have the common sense to understand that there is a very tight relationship between savings and investment and that you cannot demonize one whithout demonizing the other.

I think the austrian errors come mainly from treating “loanable funds” as if they were the only savings. But peoples “net worth” is the actual savings, not only “loanable funds”; peoples net worth may be used as a collateral for a loan and that shows how “net worth” is actually savings.

[…] One obvious example would be the 2004 Bush Administration regulations that dramatically boosted the affordable lending requirements for Fannie Mae and Freddie Mac, which surely played a role in driving the orgy of subprime […]

[…] obvious example would be the 2004 Bush Administration regulations that dramatically boosted the affordable lending requirements for Fannie Mae and Freddie Mac, which surely played a role in driving the orgy of subprime […]